Ahead of tomorrow’s FOMC decision, market expectations are turning bearish. Even as the S&P 500 consolidated sideways, defensive sectors are all starting to show signs of life by rallying through relative performance downtrends.
The CNBC Fed Survey finds that respondents expect the Fed to double the pace of the taper to $30 billion at its December meeting, which would roughly end the $120 billion in monthly asset purchases by March. The 31 respondents, including economists, strategists and money managers, then see the Fed embarking on a series of rate hikes, with about three forecast in each of the next two years. The funds rate is expected to climb to 1.50% by the end of 2023 from its range near zero today.
Psychology has turned cautious. A Bloomberg survey found that respondents are more worried about a Fed policy error of over-tightening than inflation.
The BoA Global Fund Manager Survey showed a similar result.
Positioning has turned defensive in response.
Are expectations too hawkish and psychology too bearish? A quick Twitter poll by Helene Meisler today shows that the bull-bear spread has turned decidedly negative after a bull-bear spread of +15 on her weekend poll.
Fear levels are elevated, as measured by the put/call ratio, even as the S&P 500 is less than 1% from its all-time highs.
Short-term breadth has come off the boil and it is approaching oversold levels.
This is option expiry week (OpEx) and December OpEx has historically been bullish for stocks. However, the short-term outlook is clouded by the Fed decision wildcard.
In conclusion, major bear markets don’t begin when psychology is this bearish. Recall that when the November CPI print was in line with market expectations last Friday, the S&P 500 rallied to an all-time high. Even if you believe that the bull trend is rolling over, wait for a relief rally before initiating short positions.
Disclosure: Long SPXL